Stocks down, fire the coach?

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The U.S. stock market has been making investors roughly 25 percent a year for five years – returns that nobody can scoff at.

Now we start 2014 with a bad month.

Let me use a sports analogy to help you understand how investors should be thinking: My beloved Anaheim Ducks started this season by not losing a home game in regulation time in their first 22 matches, one of the longest such winning streaks in league history.

Once the streak ended at Honda Center, should they fire the coach?

Call it capitalism. Call it conniving. Call it crazy. The U.S. stock market saw the American economy's ability to dust off the wreckage of the Great Recession well before most folks could add up the pain of the downturn. But that's what markets do – anticipate the next chapter.

The recovery may have expanded the gap between rich and poor, but that's not Wall Street's worry. The rebound was especially generous to Corporate America, and thus stock owners. The angst created by the deep downfall gave bosses wide leeway to squeeze out “efficiencies” – like, when did you last get a raise, if you are still gainfully employed? Some of the stimulus used to restore consumer confidence created business opportunities. And cheap money allowed corporations to cut their borrowing costs, too.

It added up to record corporate profits – and stock investors were rewarded.

Now we see the broader economy in full recovery mode. We learned Thursday that gross domestic product – the broadest measure of U.S. business output – grew at the fastest rate for a second half of a year in 10 years. Economists at IHS Global said that report “cements conclusion that U.S. economic growth has finally accelerated from fair to good.”

So why the Wall Street sell-off?

Some investors, like sports fans, are definitely in the what-have-you-done-for-me-lately camp. Stocks rose in advance of the broad business rebound, and now that the revival is in gear, an investor must ask “What's next?”

Investors have the right to be nervous – but not because the underlying economic is shaky. Most economists worth listening to think 2014 will be a decent year for the business climate.

Numerous people bet- ting on the U.S. stock market worry how long good times on Wall Street can last. The current bull market – dating to March 2009 just after President Obama entered the White House – is approaching its fifth birthday.

According to my stock data guru, Charles Rother at American Strategic Capital in Costa Mesa, the average bull market since 1900 has lasted 32 months. But in keeping with the broad recovery's modest pace, this is an extended Wall Street party that ranks low (22 out of 29) in terms of the pace of bull-market profits created since 1900.

When it becomes time for Wall Street to get anxious, items to be upset about magically appear.

Some skeptics point to the fact that the Federal Reserve thinks the economy is healthy enough that it is slowly “tapering” its interest rate help for the business climate. That's no surprise. Still, the loss of this boost is a modest challenge to economic progress.

Other anxious folks see economic and financial gyrations in smaller, emerging market countries as a possible precursor to business troubles in larger economies. Yawn! I recall previous, unfounded fears about the potential collapses of the Greek or Cypriot economies.

I'm most antsy about it being another big U.S. election year – and politicians of all stripes doing what's best to grab votes and not what's good for investors' psyches and portfolios.

“It's very different than a year ago,” Rother says. “Stocks were substantially undervalued. It's not going to be as fun this year.”

Rother thinks a strong stomach will be a prerequisite to investing success. He projects U.S. stocks could be up, when the year's over, by as much as 17 percent. “But don't be surprised if we have a correction that takes us down as much as 12 percent,” said Rother, who suggests that overseas stocks – especially from Europe – should top returns from America.

I will add that it's tough to see many good alternatives to the stock market.

Bonds are almost as dicey. Rising interest rates will hurt the value of most bonds, as investors will sell off older lower-rate bonds to grab newer, higher yields. I'd rather lose big on stocks, where risks are a given, vs. bonds, where the assumption – wrongly – is safety.

Want to try cash? Rates may be rising, so a banker might offer you 1 percent vs. the zero you got the past few years. Yet it is definitely the place to be if you're truly skittish – but you won't be directly rewarded for your fears. For other investments, like real estate, the challenge is to hold on to recent outsized gains.

But I know some of my readers are wondering what to do with their stocks. Is it time to take profits – or view the market's recent pullback as a buying opportunity?

Honestly, I don't have a clue. Gurus and the like might have formulas to guess at what's next – but there are no guarantees when it comes to taking risk.

A few helpful questions to ask yourself are: what is my stock market money for; when will I need it back; and can I sleep at night?

Here are my hints at when you should act on your worries. If the thought of losing a dime more upsets you badly, sell for sanity's sake.

If that stock portfolio will pay for badly needed transportation, a housing down payment to be used soon, or next year's college tuition – sell and spend the proceeds! If the stock boom has made your portfolio wildly overweighed toward stocks, at least trim holdings of some of those shares.

Now if you're grossly light on stock investments – say a young couple starting to save for retirement or a kid's college expenses – it may be time to take on more risks. Even if this is the start of an extended rough spot on Wall Street, risk-taking has a noteworthy history of paying off in the long haul.

Or if you're like me – 50-something and nearing retirement – remember that actuarial tables say you've got two or three decades left to invest. A dash of long-term vision can soothe over some risk-taking skittishness.

The bottom line: Investing isn't sports. Investors don't need championship-level profits to have a good 2014. A mildly defensive mindset, holding on to five years of sexy gains, is a decent game plan.

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